Analysts and industry insiders can blame the tough global economy and unfavorable conditions in the financial markets, but ultimately, history may adjudicate the failure of Groupon Inc (GRPN) to an age-old problem — poor management.
What else can explain Groupon stock’s loss of 55% year-to-date and shedding of 85% of equity value since its initial public offering? Certainly a poor jobs report in September and an uncharacteristically strong U.S. Dollar Index hasn’t helped matters, but these factors alone are not wholly responsible for GRPN’s collapse.
The regret many of Groupon stock’s early investors share is that the company’s current troubles were forecasted early on, prior to its much ballyhooed IPO.
Management Has Led GRPN off a Cliff
Back in 2010, GRPN focused intently on international expansion, with China’s surging emerging market economy being the primary target.
However, when GRPN finally released its daily deals website, GaoPeng.com, there were already more than a thousand direct competitors. The surge of investment dollars that was suddenly rendered ineffective due to saturation in the markets caused GRPN to shutter some of its Chinese offices after launching a mere six months prior.
Incredibly, the company continues to ride the same merry-go-round that got it into trouble in the first place.
Aggressive expansion was the name of the game despite the China failure, and at one point Groupon was represented in more countries than Amazon.com, Inc. (AMZN). The excessively broad scope stretched Groupon beyond its limits, leading to both a precipitous drop in GRPN stock as well as a dreaded restructuring plan. The corporate euphemism for layoffs impacted 1,100 jobs, with the online discounter exiting seven countries — most of them emerging markets in Latin America and Asia.
While some analysts have argued that much of the bearishness is already priced in Groupon stock, the hard numbers tell a different story. Worrisome to most of GRPN stock’s long-term investors is the fact that earnings per share continues to dip into the red despite rapidly rising revenue.
Between 2012 and the end of 2014, top-line sales nearly doubled — an enviable growth rate were it not for the fact that costs of goods sold jumped more than six-fold over the same time frame.
The resultant sharp reduction in gross margins has put profitability in a deeper hole than from which it can climb out.
If there’s a silver lining, it’s that Wall Street has very low expectations for Groupon stock’s earnings report for the third quarter of fiscal year 2015, which is scheduled for release on Nov. 3.
Unfortunately, it’s a very small consolation. Although the consensus estimate for EPS at two pennies sounds like a cakewalk, consider that Q3 revenue is estimated to bring in only $732 million, or roughly 3% below that of a year ago. Back then, GRPN stock recorded an expectation-busting 3 cents per share, but margin threats will make Q3 of this year a far more dicey affair.
The technical picture for Groupon stock provides a broad confirmation of the ugliness that could continue to reverberate in the markets. Due to the fact that shares are down 55% YTD, the current price-to-earnings ratio for GRPN stock is roughly in line with industry averages.
However, this P/E calculation is deceptive since it reflects positive net income from Q2 FY2015, which was a direct result of sales from discontinued operations. In reality, Groupon stock investors are forking over a lot of money for little to no earnings.
Bottom Line on Groupon Stock
The only real opportunity is to gamble based on pure speculation, but how is this any different than picking from a litany of no name penny stocks? While traders can make significant coin from the occasional rallies, too often for GRPN stock, they have been short-lived.
There’s little to suggest that the bears have given up, with both the 50- and 200-day moving averages trending lower since June of this year. Worse yet, the gap between the two averages has widened as Groupon stock continues its trek to hit multiyear lows.
Although it was once a promising investment, Groupon’s management team bit off more than they could chew, reaping the consequences in the form of unsustainable margins and forced asset sales.
The lack of focus towards profitability has put GRPN stock in a deep hole in the markets, one that would take a small miracle from which to recover.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
